What’s HOT in CRE?
by Kevin Thorpe, Chief Economist
It’s summertime 2013, so what better time to examine What’s Hot in Commercial Real Estate? We evaluated the U.S. economy as it relates to CRE as well as 27 individual markets across the country and you can download the full report here to augment your summer beach reading list. GDP growth remains a bit tepid at 2%, but multifamily; big-box distribution centers catering to e-commerce; new, Class-A office space; medical office; and adaptive reuse properties targeted for the creative class of tenants are thriving.
New or newly redeveloped office space (built since 2007) totals just 8% of the overall U.S. office inventory but accounts for 100% of the net absorption, dramatically increasing rents for this category. In New York City, we’ve recently tracked 22 leases at more than $100 psf in rent and a few as high as $200 psf. Similarly, in DC, higher quality buildings with Capitol views fetch rents that are, on average, $50 psf above the rest of the market. In Los Angeles, buildings with a creative space strategy lead the charge, registering some of the strongest lease-up rates and fetching some of the highest values and rents in the city. With 61% of U.S. office inventory 20 years old or older, it will be interesting to observe adaptive reuse trends over the next decade as investors retrofit these properties to meet occupiers’ evolving preferences – and generate higher rents and returns.
We’re also in the midst of a healthcare bonanza as 85 million baby boomers are getting older, sicker and fatter, and 22 million Americans will be added to health insurance rolls due to the Affordable Care Act (AKA Obamacare). Healthcare employment has increased four-fold since 1990 and is driving economic resurgence in markets across the U.S. Sales of medical office buildings (MOBs) posted a record high in 2012. On its own, Obamacare will generate demand for an additional 46 msf of new MOB development by 2017, as every new patient generates two square feet of MOB demand.
Throughout the recovery, e-commerce has been the “elephant in the room” for retailers, and e-commerce growth is now triple the rate for traditional retail, driving the growth of bulk warehouse properties that serve e-commerce fulfillment. We predict 80 msf of demand over the next few years in a marketplace that has little inventory to meet e-commerce fulfillment requirements.
Finally, it’s no secret that multifamily has been the leading CRE sector during the recovery, and we don’t see renters’ demand abating. The primary renter demographics will grow by 2.2 million annually over the next three years and continue to drive multifamily demand, potentially 50% above the norm. Certain markets will overdo it – they always do – but demand metrics support the 634,000 units currently under construction and then some. What’s more, the notion that a healthy housing sector is not compatible with a healthy multifamily sector goes against 50 years of business cycles.
What’s hot in your market, and what emerging sectors will lead the way in 2014 and beyond? We hope you have a great summer!
Kevin joined Cassidy Turley in 2007. As Chief Economist, he is responsible overseeing the Research Department in our major regional offices, as well as focusing on national trends and forecasts in the commercial real estate industry. Kevin’s group produces studies and statistics on topics affecting the national and local economy, capital markets, finance, leasing fundamentals, property and project management, and factors that affect supply-demand fundamentals in commercial real estate.